Helping you with tax relief
To help employees save for retirement, the government usually provides tax relief on the contributions they pay into their pension savings.
How much tax relief will your employees get?
Tax relief is available on employee’s pension savings up to a standard limit known as the annual allowance, but their exact annual allowance depends on how much they earn. The annual allowance includes all their pension contributions, tax relief and their employer’s contributions (across all their pension arrangements). The annual allowance for the current tax year is £40,000 – but those employees who’ve already taken any money out of their pension savings may have a lower annual allowance.
Under HM Revenue & Customs (HMRC) rules, each tax year your employees can receive tax relief on 100% of their relevant UK earnings (up to the annual allowance) or £3,600 gross (£2,880 net)* – whichever is higher. Relevant UK earnings are those earnings which are subject to UK income tax. If your employees are classed as Scottish tax payers, they’ll pay different tax rates to that of the rest of the UK. For more information please visit HMRC’s webpage on the Income Tax in Scotland.
Don’t forget to include your employees’ National Insurance numbers when submitting your data. Without their NI numbers, your employees (under HM Revenue & Customs rules) won’t be able to get tax relief on their contributions. To find out more on why you need to include all your employees’ NI numbers visit our help and support.
*Due to the way tax relief works on workplace pension schemes, those whose earnings are below the standard personal allowance of £11,850 can only receive tax relief if they pay into a scheme which is set up on the ‘net tax basis’ (see below).
There are two tax relief methods
When you set up your workplace pension with The People’s Pension, you can choose to deduct your employees’ contributions from their wages either before or after tax.
Tax relief can be applied in two very different ways (and it’s important to get it right):
- Deducting employee contributions after tax? We call this the net tax basis (more below).
You may see HMRC referring to this as the ‘relief at source’ method. When you sign up to The People’s Pension, we’ll automatically set you up on the net tax basis.
- Deducting employee contributions before tax? We call this the gross tax basis (more below).
You may see HMRC referring to this as the ‘net pay arrangement’ method. If you choose this option, you’ll need to call us on 01293 586666 to set this up.
Getting it right is essential
You need to check that you’ve applied the same tax relief settings to your employees’ pension contributions on your payroll and on your pension scheme. If you use a different method on your payroll to the way your pension scheme has been set up with us, it’ll mean more work and additional submissions to HMRC.
HMRC are becoming more vigilant in monitoring tax relief – in some cases revealing and fining employers who have managed tax relief incorrectly. Also, if the tax settings are incorrect, it could mean that the contributions are less than the minimum legal requirement.
When you sign up, we’ll ask you to confirm that your payroll has been set up to deduct employee pension contributions on the correct tax basis. We’ll also ask you to check and confirm you understand the tax basis every year.
Net tax basis (deducting contributions after tax)
Net tax basis is the default tax relief method with The People’s Pension. So we’ll automatically set you up on this arrangement when you sign up to The People’s Pension. HMRC call it ‘relief at source’.
Net tax basis is great for lower paid employees:
- Under this tax basis you’d deduct employee contributions from their pay after tax is taken. (That’s why we call this tax basis net.)
- Then, The People’s Pension claims the tax relief – at the basic 20% rate of tax – from the government. If any of your employees are Scottish taxpayers and they pay the Scottish starter rate of Income Tax at 19%, we’ll still give them tax relief at 20% and HMRC won’t ask your employees to repay the difference.
- And it’s then added to your employee’s pension savings.
If your employees don’t pay tax as their earnings are below the annual standard personal allowance (£11,850), they’ll still get tax relief on their pension contributions at the basic rate of 20% as follows:
- If they don’t have any earnings, or they earn up to £3,600 a year, they can pay in up to £2,880 every year and the government will top up their contribution with tax relief to make it £3,600.
- If they earn more than £3,600, they can pay in up to 100% of your earnings and receive tax relief (up to the annual allowance) every year. The annual allowance for the current tax year is £40,000.
If any of your employees pay more than the basic rate of tax, they can claim the extra tax direct from HMRC through their tax return.
Example – Mike doesn’t earn enough to pay tax. £8 goes from his wages into his pension pot. Then The People’s Pension claims 20% in tax relief, adding an extra £2 to Mike’s pension pot – the same 20% rate as a basic rate taxpayer.
Gross tax basis (deducting contributions before tax)
Pension contributions taken under the ‘net pay arrangement’ are actually taken from the gross pay, not the net as HMRC’s title suggests! So we call it the gross tax basis instead.
Gross tax basis works well if all your employees pay tax:
- Under this tax basis you’d deduct employee contributions from their pay before tax is taken. (That’s why we call this tax basis gross.)
- So, your employees will automatically get full tax relief on their contributions straightaway, regardless of the band or rate of tax they pay, or whether they live in Scotland or elsewhere in the UK.
- But unlike the alternative net tax basis, it means lower paid employees who don’t pay tax won’t receive any tax relief.
With the gross tax basis, employee contributions are deducted from their pay before any tax is taken. So if they pay more than the basic rate of tax, they get the full tax relief straightaway.
Example – John normally pays the basic 20% rate of tax. £50 goes from his wages into his pension savings, before any tax is taken from his pay. This reduces his taxable earnings by £50 so he pays £10 less in income tax.
However, any employees earning less than the standard personal allowance of £11,850 a year (for the 2018/19 tax year) won’t receive tax relief because they don’t earn enough to pay tax.
We’re here to help
Not sure which tax relief basis to choose?
You can call us on 01293 586666.
Want to change your tax relief settings?
Email us at email@example.com.